Buy Bajaj Electricals; target of Rs 500: ICICI Direct

ICICI Direct's research report on Bajaj Electricals

Bajaj Electrical’s Q1FY21 performance was muted but this was perceived to be due to lockdown and higher fixed cost components in its EPC business. The loss of revenue for almost 40 days dragged the overall performance of the company in Q1FY21. However, a recovery in demand from rural regions (~two-third of sales) helped drive the recovery in ECD segment in Q1FY21. Key takeaways from conference call are: 1) Month on month improvement in ECD demand post ease in lockdown restriction, 2) Market share gains in ECD segment from unorganised segment, 3) Average price hike of ~2-3% helped gross margin expansion in ECD segment by ~200 bps YoY, 4) Rationalisation of fixed costs in coming quarters, 5) Focus on increasing ECD segment EBITDA margin by 1% YoY on a normalised operating scenario, 6) Sales through e-commerce platform are ~13% in Q1FY21, 7) Focus on reducing proportion of loss making projects, 8) The company plans to reduce debt by ~ Rs 300 crore by FY21E. BEL did manage to reduce gross debt by ~Rs 150 crore through CFO of Rs 145 crore generated during Q1FY21. As a result, interest cost fell ~45% in Q1FY21. We expect focus on strengthening balance sheet condition and rising proportion of CD business to bode well for the company given its strong rural presence.

Outlook

While the Q1FY21 performance was impacted by lockdown, we saw an improvement in balance sheet position with further reduction in gross debt by ~Rs 150 crore. We believe BEL’s debt reduction plan would lead to a significant fall in interest outgo. Improved profitability, lighter balance sheet would help drive return ratios from FY22E onwards. On an SOTP based valuation, we value CD, EPC at 20x, 3x of FY22E EBITDA, respectively, and maintain BUY rating with a revised target price of Rs 500.

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